by Daniel Putnam | August 2, 2012 1:20 pm
Investors who are looking for broad exposure to the U.S. market typically choose the SPDR S&P 500 ETF (NYSEARCA:SPY), as evidenced by its massive $108.8 billion market cap and its status as the largest ETF in the country. Another S&P 500–linked ETF, iShares S&P 500 (NYSEARCA:IVV) isn’t far behind with a $30.7 billion market cap and a No. 7 ranking.
While nobody’s complaining about the strong three-year performance and minuscule 0.09% expense ratios of these ETFs, those who have gravitated to SPY and IVV have missed out on the stellar relative performance of another broad-based domestic fund, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA). DIA has delivered superior returns across all time periods:
What’s going on here? The Dow isn’t exactly known for being a source of beta. But dig below the surface, and three important factors stand out as the reasons for its outperformance:
Whether or not DIA can continue its long-term outperformance is in large part a function of these three trends. To hold DIA in favor of another broad-based ETF is essentially a bet that financials will keep underperforming, while IBM and the defensive names keep trending higher.
There’s nothing to suggest any of these trends will change right away — and IBM appears undervalued — but investors still need to understand that different factors will drive DIA’s performance relative to SPY.
The table below shows how the two ETFs stack up. While SPY offers better growth and is more cheaply valued by certain measures, DIA has the edge in terms of yield, P/E and volatility statistics. The volatility measures are an interesting consideration, because they show that DIA has been able to achieve its superior returns not by having a higher-risk portfolio, but through the strong performance of its underlying holdings.
|30-Day SEC Yield||2.41%||1.94%|
|Est. 3-5 Year Earnings Growth||8.99%||10.68%|
|Forward P/E (1-Year)||12.5x||13.3x|
|Return on Equity||30.2%||31.2%|
|Weighted Market Cap||$14.8 B||$11.4 B|
|Beta vs. S&P 500||0.88||0.99|
Put it all together, and it appears that DIA can continue to act as a sound option for investors looking for a core domestic large-cap holding. You just need to be aware of exactly what you’re buying.
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